What is Yield?
Yield — in German: Rendite — is the annual return you earn from holding a bond. It's the single most important number for comparing bonds because it accounts for both coupon payments and the price you pay.
Yield is the return an investor earns from a bond, expressed as an annual percentage. Unlike the coupon rate (which is fixed), yield changes based on the bond's current market price. Higher price means lower yield; lower price means higher yield.
Current Yield
Current yield is the simplest measure: Annual coupon payment ÷ Current market price. If a bond pays €30 annually and costs €1,000, current yield is 3%. If the price drops to €900, current yield rises to 3.33%.
Yield to Maturity (YTM)
YTM is the total return if you hold the bond until it matures. It includes coupon payments, the difference between price paid and face value received, and assumes reinvestment of coupons at the same rate. This is the standard yield quoted in markets.
The Yield-Price Relationship
Bond prices and yields move inversely. When interest rates rise, existing bonds with lower coupons become less attractive, so their prices fall — and their yields rise to compensate. This is the most important relationship in fixed income.
Yield vs. Coupon Rate
| Aspect | Yield | Coupon Rate |
|---|---|---|
| Definition | Actual annual return | Stated interest rate |
| Changes | Moves with market price | Fixed at issuance |
| Calculation | Complex (considers price) | Simple (face value × rate) |
| Comparison use | Yes, compare any bonds | Only bonds at par |
Practical Example: Yield Calculation
A Bund with 2.5% coupon trades at €95 with 5 years to maturity. Coupon payments: €2.50/year. Capital gain at maturity: €5 (€100 - €95). YTM calculation accounts for both, resulting in approximately 3.6% — higher than the 2.5% coupon because you bought at a discount.
Frequently Asked Questions
What is yield in simple terms?
Yield is what you actually earn from a bond annually, accounting for the price you paid. It's like the 'real' interest rate you receive.
Why does yield matter more than coupon rate?
Because coupon rate ignores the price you pay. A 5% coupon bond bought at €150 has a lower yield than a 3% coupon bond bought at €80. Yield tells the true story.
What does 'yields are rising' mean?
When yields rise, bond prices are falling. Investors demand higher returns, pushing prices down. This often happens when central banks raise interest rates.
Is higher yield always better?
Not necessarily. Higher yield often means higher risk — the issuer may be less creditworthy. German Bunds yield less than Greek bonds because they're safer.
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